Europe rejects Greek bailout extension after referendum shock

Greece hurtled towards default and a possible euro exit Saturday after Europe responded to the leftist government's announcement of a surprise referendum by refusing to extend Athens's desperately needed bailout.

The most dramatic day in the five-month crisis saw long lines of people queueing at cash machines in Greece after the announcement by radical Prime Minister Alexis Tsipras, amid fears of a bank run and possible capital controls.

In Brussels, Greek Finance Minister Yanis Varoufakis had asked eurozone colleagues to stretch the aid plan for a few days past its June 30 expiry date and until after the July 5 referendum vote on a creditor reform plan, but they unanimously rejected his appeal.

The move leaves debt-laden Athens struggling to meet a crucial 1.5 billion euro IMF debt payment on Tuesday, putting Greece's place in the single currency at risk and threatening the entire post-war European project.

"The Greek government has broken off the process, has rejected the reform proposal and is now putting the question in a negative way to the Greek people, which is an unfair way of putting the question," Eurogroup president Jeroen Dijsselbloem told a press conference.

"Given that situation, I think we might conclude that however regretful, the programme will expire Tuesday night," the Dutch minister said.

Underscoring Greece's perilous position in the currency union, Dijsselbloem said the other 18 eurozone finance ministers would now hold fresh talks without Greece present to discuss the "consequences" and "prepare for what's needed to ensure the stability of eurozone remains at its high level."

- Greece fears 'permanent' damage -

The Greek parliament will vote on whether to go ahead with the referendum at midnight (2100 GMT), after an address by Tsipras.

The outspoken Varoufakis warned that the decision could permanently damage the single currency, formed in a bid to bring unity to a once fragmented continent.

"The refusal of the Eurogroup today to endorse our request for an extension of this agreement for a few days or a couple of weeks ...will certainly damage the credibility for the Eurogroup as a democratic union and I am very much afraid the damage will be permanent," Varoufakis said.

But he said he was "still fighting" for a deal, and insisted the radical leftist Syriza government would "honour the verdict of the Greek people" in the referendum.

A Eurogroup statement issued after the meeting said it was "supported by all members... except the Greek member."

Greece's negotiations with its international creditors that have dragged on since January, when Tsipras's Syriza party first took power on a promise of ending austerity after two EU-IMF bailout programmes since 2010, worth 240 billion euros.

Syriza has repeatedly refused to make cuts to pensions and changes to the VAT system demanded by Greece's bailout monitors: the European Commission, European Central Bank and International Monetary Fund.

A week of intensive talks in Brussels ended with Greece's creditors on Friday offering Athens a five-month, 12-billion-euro ($13.4-billion) extension of its rescue programme, on condition it committed to fresh reforms.

Germany's hardline pro-austerity finance minister Wolfgang Schaeuble said the Greek government had "ended the negotiations unilaterally" and rejected that offer.

- ATM queues -

The European Central Bank will now play a crucial role in ensuring Greece's banks have the cash to open on Monday, and two top Tsipras aides were meeting ECB head Mario Draghi in Brussels on Saturday.

The governing council of the ECB was also reported to be meeting on Sunday, and was "closely monitoring developments", the bank said.

Greece was stunned by the referendum announcement by radical leader Tsipras, which came just hours after he had been at a summit with European leaders in a bid to end the crisis.

"The people must decide free of any blackmail," the 40-year-old prime minister said in a televised address to the nation late on Friday.

"We were asked to implement austerity measures... allowing the deregulation of the labour market, pension cuts, and an increase in VAT on food products, targeting the humiliation of an entire people," Tsipras said in his address.

Queues built up at cash machines in Athens. In Greece's second city, Thessaloniki, some banks have run out of money, according to an AFP reporter, while a National bank branch had a queue of 50 people.

"I have a shop. I came to the bank to withdraw as much money as I can in order to cover the needs of my shop for next week," 42-year-old Maria Kalpakidou told AFP.

Demand at petrol stations was also said to have "heightened" but there were no fuel shortage problems, according to state news agency ANA.

Draghi has been keeping the Greek banking system alive with near-daily cash infusions as it is frozen out of the capital markets.

The Eurogroup will now discuss worst case scenarios, ranging from a Greek default next week to a possible exit from the eurozone and even, as suggested by the Greek central bank, the 28-nation European Union.